With increasing recognition of the benefits of income protection by IFAs and a strong mortgage market, sales are doing well, finds Paul Robertson
The individual income protection (IP) market has shown modest growth over the last 12 months. The latest figures from Swiss Re show new IP sales grew by 10.6% in 2001, totalling 204,379 policies. This figure contrasts with the previous year's figures which, at 184,000, were down 5,000 on 1999's figure.
Giving an overview of the market, Ron Wheatcroft, technical manager at Swiss Re Life and Health, says: 'The individual income protection market has historically been quite stable, with around 1.7 million to 1.8 million in force on the individual side. However, now we have the market finally hitting 200,000 policies.'
While part of the increase in sales must be put down to a natural recovery from the previous year's poor figures, a major driving force is the lively housing market. The growth in IP is closely associated with mortgage protection. Swiss Re's figures show 41.1% of individual IP sales were mortgage rather than income-related in 2001. This contrasts to 39.7% the previous year and a smaller 13.9% at the start of the housing boom in 1998.
Rosalind Pearson, personal finance research and planning manager at Swiss Life, says: 'The latest market surveys show the main reason for the increase in sales has been down to mortgage-related sales. This is an interesting development especially as the growth in mortgage sales would appear to be at the expense of full income protection. However, while mortgage income protection is a cheaper option, there is an argument that even if the mortgage is taken care of, additional money is still needed to live on.'
Some take the view that the amount of cover taken out through IP should be left up to the IFA selling the product.
Laura Shanks, product development manager at Scottish Equitable, says: 'The client and adviser must decide if the cost of protecting the salary is too much, and if they would be better to just cover the mortgage and key liabilities. We do not wish to go down the route of tying income protection to any specific expenditures.'
This opinion is echoed by Ronnie Martin, protection director at Legal & General Protection. He says: 'In an ideal world, you could say we should be protecting the client's entire needs, but affordability will always be uppermost in a person's mind. We believe that it is about prioritising protection. Cover the mortgage first, then think of adding cover on top.'
With around 80,000 sales on a mortgage basis, it would inevitably reduce sales if the housing market were to slow. However, this would also be the case for other protection products. Swiss Re claims over 50% of new term assurance sales are mortgage-related, in addition to a similar percentage of critical illness (CI) policies. Indeed, all protection business, to a certain degree, depends on a successful mortgage market. At the moment, for example, interest rates are low so it is more attractive to take out protection as it is more affordable.
It is, of course, possible that IP sales are growing in their own right, regardless of mortgage sales. There is recognition of this product by lenders, who have in the past been successful in selling accident, sickness and unemployment (ASU) cover. While ASU does provide a level of cover, many intermediaries see it as a rather limited product.
Nick Homer, IP protection manager at Norwich Union, holds this view. He says: 'While it may be due to the mortgage that income protection is being considered, it is not always directly related to it. Taking out a mortgage is often just a good trigger to make people consider protection as a whole.'
He adds: 'At Norwich Union, we are still seeing it sold to retirement rather than as a mortgage term product, which indicates IFAs are selling it as part of a full financial review. I think IFAs are recognising it as their responsibility to offer clients a full protection package, rather than just for a mortgage term.'
There is no doubt the intermediary community is getting to grips with IP products. Swiss Re says 48% of all individual IP was sold through this channel in 2001, compared to 34.5% the year before. This increase generated 98,138 IFA-based sales, up from 63,835. However, almost everyone in the sector sees room for growth.
Martin says: 'IFAs have an important part to play. They have a vital role in analysing the client's needs and income protection must come near the top of the priority list. IFAs are increasingly recognising this, but there is still a long way to go.'
Shanks agrees: 'The industry's attention has recently been more on critical illness, due to all the uncertainty about guaranteed premiums and the changing of definitions. For the future we have to get more IFAs to sell income protection. I can understand why a lot of IFAs have chosen not to sell it, because they perceive it as complicated having a difficult claims process. There are a lot of perceived uncertainties and product providers need to ensure that everything is made as clear as possible.'
The key to success in this market appears to be claims management and early intervention is recognised as crucial in the successful rehabilitation of claimants.
In the group IP market, claims management goes some way to meeting employers' responsibilities towards its staff in terms of the Disability Discrimination Act. But all the main providers of this product now view getting people back to work as a major tool in keeping down costs in the individual sector too. Using the services of occupational health practitioners and health professionals has been core to the claims management process.
Janine Menasakanian, head of provider liaison at IFA Inter Alliance, says: 'In the insurance market in general, we no longer have a lot of providers offering good products. We have a series of niche players that have got their act together and who are looking at the whole end-to-end process. Providers are trying to improve their claims stage, making the process slicker.'
She added: 'We see the future market for income protection being massive. There are a lot of young people who are going to be suffering from stress, which can take them off work for extended periods. For them, income protection is exactly the right plan both for the protection it provides and because of the claims management.'
Other facets of the product's design are the continuing rise of menu-based products and the debate over guaranteed rates. Homer admits that removing the guarantee has had an effect on sales. He says: 'Because we do not offer guaranteed rates, and were one of the first to move away from them, it is still quite a challenge for us in the IFA market, although we have seen some growth.
'However, we have seen significant growth of income protection as part of a menu product, rather than standalone. Mortgages take up a lot of time and we have had success with menu products because they significantly shorten the interview process and give cost savings. Income protection is generally the last in the list, but this focused approach means at least people think about it. There are a number of providers with menu products already, but I wouldn't be surprised to see more people enter the market.'
Menasakanian gives an intermediary's view: 'We use menu-based products a lot, but for standalone income protection we do like to use the guaranteed rates. We will look at other products if price sensitivity is an issue as products without guaranteed rates can often come up cheaper.'
Looking to the future, the main blot on the horizon is regulation, due to be introduced in 2004. Once the much-delayed European Directive is signed it triggers a process whereby the Treasury will issue a consultation paper on draft legislation and the FSA will begin its consultation. This will take the usual form of a series of papers looking at different issues.
While admitting that it is early days in this process, Wheatcroft believes that because the margins on protection products are much thinner, the regulatory regime should not be as comprehensive as regulation surrounding the investment markets.
He says: 'I don't think it would be appropriate to look at the rules governing investment and apply them to the protection market. The products are a lot simpler. It would mean intermediaries who sell income protection and other protection products but don't sell investment business, would become regulated. This raises the question of whether they apply for direct regulation like a broker or become an agent of another company. There may be intermediaries, such as estate agents, that sell purely protection products that may not feel it is worth it.'
It is well-recognised there is a cycle in the life of products, a recession for example, generally sees an increase in claims followed by an increase in premiums. The market is right for IP at the moment due to the booming housing market and low unemployment ' this is likely to continue for the foreseeable future. The IP market continues to grow, with sales showing upward trends and there is no obvious reason why this will not continue.
Paul Robertson is a staff writer
